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Wednesday, September 17, 2008

A Desperate Flight To Safety

This will provide some support for the Euro, considerable support for the British pound, and substantial dollar support.

The Russians are throwing money at it, but so far the money isn't sticking. The Indian rupee's slide is unabated, primarily on repatriations of money as FIIs pull out, and it seems as if local institutions are buying dollars. India, Inc. is a bit shaken up. ICICI has taken a bit of a hit off the Lehman BK, and in general it appears that its drive to raise capital in pounds hasn't worked out too well (for a while last year, it was paying among the highest rates for time deposits). India's central bank tried to sell dollars to stem the slide, but failed:
As rupee lost 1.8% to close at a 27-month low of Rs 46.89 per dollar on Tuesday, RBI intervened in the forex market. It not only sold dollar aggressively to contain the slide in the rupee but also announced a slew of measures like hiking the interest rate on foreign currency deposits. In the last two days, rupee depreciated by 2.62%.

"In the light of the current development in the forex markets, the Reserve Bank will sell dollars through agent banks to augment supply in the domestic forex market or intervene directly to meet any demand-supply gap," the apex bank said in a statement expressing its concern over the crisis in the financial market.

The RBI also announced additional liquidity support to banks as a temporary measure, from Wednesday, in the light of advance tax payment by corporate houses, which could create tighten liquidity in the market.
The worry about the Indian public banks is that they are sitting with those oil bonds.

In the US, shorter T-bill yields are collapsing. The fight now is not to get a return on your capital, but to find some safe store of value for your capital.

Nor is the round of financials going bust confined to the US. HBOS had to announce it was in merger/buyout talks to stop its collapse:
HBOS Plc, the U.K.'s biggest mortgage lender, slid as much as 52 percent today on speculation it may not have access to funding. The shares rebounded, surging as much as 18 percent, as HBOS said it's in ``advanced'' takeover talks with Lloyds TSB Group Plc.

Trust Vanishes

``Everybody is worrying about which bank is going to go bankrupt next,'' said Ronald Tharun, a money-market trader in Stuttgart at Landesbank Baden-Wuerttemberg, Germany's biggest state-owned bank. ``There's almost nothing being traded in the money markets. Nobody trusts anyone else.''
Famous last words. One of the reason this maniacal situation benefits the dollar somewhat is our system of bank insurance. You can deposit money in a US bank and get at least your principal back as long as you don't exceed the insurance limits. Congress will be infusing money into that system shortly....

Oil prices (for the short term) are stabilizing in the lower 90s. Someone might try to run it up, but it's not a safe store of value right now.

Citi was over raising money in yen with bond issues in Japan right before this hit. I doubt that very many banks or financials will be able to do the same. The ability to scavenge up capital to shore up balance sheets is evaporating very quickly. Hoho. I went googling on samurai bonds, and found that Deutsche Bank is delaying its bond issue.

A classic credit crunch, and only time will tell how well the central banks of the various players will be able to get the money moving again:
The Bank of Japan pumped 3 trillion yen ($29.3 billion) into the financial system today, for a total of 5.5 trillion this week. The Reserve Bank of Australia added A$4.285 billion ($3.45 billion). Global central banks from Tokyo to Frankfurt have added more than $200 billion since the beginning of the week.
This is almost the worst possible scenario for European corporate debt. A huge amount of it has to be rolled over in the next two years.

I am watching the rupee play because it has implications for China. India and China should be able to continue growth, but at a slower pace. There are property and other devaluations (bubbles bursting) in both of these countries. The lower the rupee slides, the tighter the options for China, because it is almost inevitable that some of India's exports will gain at the expense of China's.

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